SAYING “I DO” TO FIDUCIARY RESPONSIBILITY

By:  Hal Bartholomew, CFLS and Beverly Brautigam, CPA

Reprinted from California CPA – Volume 73, No. 1, July 2004

If you are advising a spouse who is the decision maker – be careful.  Generally, a husband and wife owe one another duties of mutual respect, fidelity and support.  Failing to advise happily married clients about the fiduciary duty between spouses could result in penalties to one spouse and even future windfalls to the other spouse due to lack of disclosure.

How can your client get in trouble?  Suppose your client uses his separate property rather than community property to make an investment that goes up in value.  Questions that arise include:  Why didn’t he use the community?  And why didn’t he allow the community to benefit from the investment?

Or, suppose your client – and the community – own stock in a company.  Your client sells his stock, which then goes down in value, but not the community’s.  Why did he allow the community to suffer from the decrease in value, but sell his stock?

Any transaction between a husband and wife arises in the context of a confidential relationship imposing a duty of the highest good faith and fair dealing on each spouse, with neither side taking unfair advantage of the other.

The standard of care stems from California’s public policy that marriage is an equal partnership and that spouses owe each other the same highest duties owed by parties to a fiduciary relationship.

FAMILIAL DUTIES
In 2003, the California Legislature redefined the fiduciary relationship between spouses to include all of the duties owed by nonmarital business partners in Family Code Sec. 721(b).  This confidential fiduciary relationship includes, but is not limited to:

• Providing access at all times to any books regarding a transaction for the purpose of inspection and copying;
• Providing, upon request, full and true information about any transactions concerning community property; and
• Accounting to, and holding as a trustee for, the other spouse any benefit or profit derived from any transactions concerning community property that occurred without the other spouse’s consent.

When a transaction between husband and wife is advantageous to only one spouse, the law presumes the transaction to have been induced by undue influence.  The “advantaged” spouse would need to show that the transaction was freely and voluntarily consented to, with full knowledge (of the other spouse) of all the facts and a full understanding of the effect of the transfer.

MANAGEMENT AND CONTROL
A spouse who is primarily managing and controlling a business may act alone in all transactions, but is required to give prior written notice to the other spouse of any sale, lease, exchange, encumbrance or other disposition of all of the personal property used in the business operation, whether or not title to that property is held in the name of only one spouse.

This duty includes the obligation to make full disclosure to the other spouse of all material facts and information regarding the existence, characterization and valuation of all assets in which the community has or may have an interest; debts for which the community is or may be liable; and to provide equal access to all information, records and books that pertain to the value and character of those assets and debts, upon request.

To protect your client from claims of mismanagement of marital property, you should advise your client to keep the other spouse fully informed regarding major transactions and provide written notice and full disclosure.

BREACH OF DUTY REMEDIES
A spouse can file a civil action against the other spouse for abuse of this fiduciary duty.  But these problems that arise between a couple usually result in one spouse filing for divorce.

When one spouse fails to act in accordance with the fiduciary duty, the aggrieved spouse has several statutory remedies.

When one spouse’s undivided one-half interest in the community estate is impaired by the actions of the other spouse, a court may order an accounting of the property.

Any asset undisclosed or transferred in breach of a spouse’s fiduciary duty could result in a 50 percent or even 100 percent penalty.  Remedies may include an award to the other spouse of 50 percent of any asset – plus attorney’s fees and court costs.

Remedies when the breach arises from oppression, fraud or malice could include an award to the other spouse of 100 percent of any undisclosed asset.

Interspousal fiduciary duties is a complex area of law that must be clearly conveyed to clients.

Hal Bartholomew, CFLS, is with the Sacramento law firm of Bartholomew & Wasznicky LLP.  You can reach him at Hal@DivorceWithRespect.com.  Beverly Brautigam, CPA, PFS, is with Brautigam & Co. in Sacramento.  You can reach her at divorcetax@sactaxcpa.com.